On Fairness

February 26th, 2012 | Categories: Uncategorized | Tags:

In which I describe how my idea of fairness is different from free market principles.

In this post, I talk about the definition of fairness in the context of economic transaction. Many of you may have simple framework based on free market principles to judge a transaction as fair or unfair. I have a different framework that is based on equality. This post should be read from a philosophical standpoint and not from a practical or enforcement standpoint.

Two Transactions

I will present two transactions to you. Both of them follow free market principles. I would like you to judge if these transaction are fair. First, a rich businessman approaches several equally rich engineers and arrives at $200 as a price for a job, which is given to least expensive engineer. Second, knowing that the price of the job was $200, the businessman goes to a poorer, desperate (for tangential reasons) engineers. The businessman uses the poorer engineers’ lack of bargaining power to establish $50 as the price for the same job. All the engineers are equally skilled and efficient at the job. My question is: do you think the second transaction was fair? If the businessman goes to the poorer engineers first and then to the richer ones, are the same transactions fair?

Fairness

If you argue that the all transactions were fair because they were all mutually agreed upon by the parties involved (free market economics), I respect your judgement, but I disagree with it. I think that fairness and free market principle are different entities altogether. I think that free market is just one of the many possible systems to distribute capital and resources.

My framework to judge fairness is based on equality. If the businessman *knowingly* exploits the lack of the bargaining power, which has got nothing to do with the job, I think that he is being unfair. You may ask me how I know that $200 is the “real” price for the job. The key term in my definition is “knowingly.” If the businessman genuinely thought that $200 was too much, and that $50 is reasonable, I wouldn’t call it unfair. In the second case, where the businessman approaches the poorer engineers first, he does not really know the price of the job, and so he negotiates the best he can. I wouldn’t call that unfair either. We assume here that the businessman used his bargaining position, which had no relation to the job, to treat people in different ways. Fairness goes the other way too. If the engineers were to treat different businessmen differently, I would call them unfair too.

What if it Happens to You?

I would like to put the same question in the context of your employer. Suppose your boss knows that you and  your colleague are both equally productive and equally valuable to the company. And he also *knows* that you are desperate to keep this job. Perhaps, you and your spouse  just had a baby, and cannot afford to change health insurance plans, while your colleague  can afford to quit the job and look for a new one because he has a richer ancestry. Or, perhaps, your colleague may be as desperate a you are. If your boss decides that only your colleague gets a bonus for no reason (your boss tells you so), would you still call that fair? Remember that reason why he decided to treat you unequally had nothing do your job, but other tangential reason, and everything here follows free market principles; you are free to walk away from your job if you don’t like the salary.

Personal Confession

I knew that the previous owner from whom I bought my car was going out of country in a few days. So I used that information to lower the price I paid for the car. In my opinion, I was being unfair to him because the value of the car had got nothing do with his going abroad. Will I be unfair next time I am a part of such transactions? I think I will be. I am not taking a moral highground. I think that the social cost of my unfair actions is not very high. I hope I will be less selfish if the social costs are high.

Relevance to Foxconn, Walmart and Apple

Clearly, everyone knows that Chinese workers are more desperate for work. The companies use this to exploit them. I have read many posts online that explain that it is fair because it follows free market principles, and that their life is better off as a result. I have to disagree with that reasoning. No one would complain if the employees has a decent standard of living. But we all know that condition of workers in Foxconn (link) and Walmart (link). The companies are not doing the worker a favour by giving them the job. It is business transaction in which the workers are being treated worse thay should be (based on my framework on fairness). The social cost of their actions is very high. That is the reason why their practices are frowned upon.

Practical?

I realise that enforcing my idea of fairness is not practical. Walmart can simply say that they genuinely believe that their worker do deserve health insurance. This is where government mandates come into play. I am not a fan of ideas that imply fairness if all rules are followed (government rules or otherwise). How would you decide if the rules are themselves fair? I think a judgement on what is fair should not have external dependence because it is a personal moral compass.

Other Frameworks

I have not had the time to read any of the following wiki links or books to which they refer. If you happen to know other frameworks (described in the links below or otherwise), do let me know.

a. Justice as Fairness: John Rawls conception of Justice

b. A Theory of Justice: A book by John Rawls.

c. Justice as Fairness: A Restatement: A book by John Rawls

d. The Theory of Moral Sentiments: A book by Adam Smith

e. The Idea of Justice: A book by Amartya Sen

Comment Policy:

If you diagree with me, provide your framework, and let me know what you think about the transaction with your employer.  It’s a simple “is it fair” question. Keep it to the point. Please do not explain free market principles to me in a hundred possible ways (willingness to pay, current value of the job to the engineer or businessman etc.). I have a different framework. Please respect it.

  1. Mahesh
    February 26th, 2012 at 16:10
    Reply | Quote | #1

    You should define the framework for evaluating fairness better, I suppose. For instance, in your car transactions, who’s to say the other person was being fair? Perhaps he knew of problems with the car that he did not disclose, or he may have not been diligent with scheduled maintenance. Stretching it further, an $X difference may have been more significant to you than to him (a likely scenario given that he bought the car at a much higher price and you were a relatively new graduate student.) The $X may have hardly mattered to him given that he was going off to a full time, presumably well paying job, while you were just starting to earn, and a graduate assistant’s income at that.

    So using a priori awareness of unfairness is not a sufficient metric for evaluating the fairness of the transaction. You also need to consider the competence with which the ‘awareness of unfairness’ was arrived at. I just pointed out that in your own confession, you did not evaluate the situation in its entirety in arriving at the conclusion that you were being unfair.

    Now regarding to the thought experiment that opens your post, two things:

    1. Free market would probably assign a value of $(200-50) of $150 to the ability to bargain. (Tangentially, I suppose the reasoning for why MBA is regarded so highly is along these directions.)

    2. You are implicitly assuming that the value of $200 or $50 are themselves fair. This may hardly be the case. You need to explicitly consider, as I outlined for your car transaction, how appropriate the notional values of $200 and $50 are. As I understand it, free markets decide these values on a competitive basis. Regulated markets and unionized employees set these wages based on negotiations, but the values continue to remain notional. An example of harmful unionization is how UAW’s negotiated incentives severely crippled GM’s ability to be an efficient and profitable carmaker for several years. I suppose neither of the two dogmas- regulation+unionization vs. complete free market are right. A judicious and pragmatic combination of both is needed for social equity.

  2. Mahesh
    February 26th, 2012 at 16:13
    Reply | Quote | #2

    Gah! Wish i could edit my comment for grammar. Please apply corrections as necessary. :P

  3. Coolshankin
    February 26th, 2012 at 18:10
    Reply | Quote | #3

    @Mahesh

    With regard to my personal confession: I make an assumption that I know everything about the car. The *only* reason why I was able to negotiate the price was that he was going away. If not, I would have paid more. Yes, my saving $X was much bigger then his losing $X. But it is still unfair (according to my framework) to some limited, possible inconsequential, extent.

    Two points you made:
    1. The ability to bargain has nothing to do with the job in my thought experiment. But an MBA is hired for his training in B School, which some may consider irreplaceable. So technically, there is a reason why they get paid more.

    2. Yeah, I am assuming that $200 or $50 are themselves fair. The assumption I made is that the business man genuinely believes that $200 is a fair price. I understand that the reason why we follow free market is so that such a price agreement is reached. But in some practical cases, such as Foxconn, it is quite obvious who is getting the raw end of the deal.

    I would subject unions to the same metric of fairness, too. Would they treat all employers the same way or would they take advantage of some of them? UAW is known to be nasty, but I have not seen the numbers about how much money they asked for retirement benefits etc. So I will reserve my judgement on that.

  4. Manohar Seetharam
    February 27th, 2012 at 03:41
    Reply | Quote | #4

    In your analysis I don’t see you arguing for “Fairness” as an independent concept, instead it stands out like tool designed to serve “Equality”. There is a fundamental conflict between “Fairness” and “Equality”. “Fairness” to me means – to discriminate as much to treat everything within “Equality”. An employee in China and US are equals only in the plane of Humanity. They are economically, socially and politically non-equals.

    On the personal question – Yes, I would feel it to be unfair on me (or anyone else). But in my framework, it is essential to discriminate between this case and the China case. Things have to be open to interpretation and judgment.

    Actually, your focus,concern and interest is- equality, and you should consider thinking deeply about equality as an independent concept.

    PS : What is with this intolerant comment policy ?

  5. Coolshankin
    February 27th, 2012 at 12:13
    Reply | Quote | #5

    @Manohar Seetharam
    Perhaps, I am using fairness to serve equality. That’s my framework. I see them as interdependent entities. Can you give me an example to explain the difference between fairness and equality? What is your framework on fairness? I did not understand it.

    The reason for the comment policy is so that people do not start explaining free market principles to me. I have had this discussion with few other people and, I have been explained free markets in a different ways.

  6. Manohar Seetharam
    February 29th, 2012 at 13:04
    Reply | Quote | #6

    If you remember the e-mail exchange we had on the issue of whether gays and homosexuals must be granted the same status of family & marriage on the grounds of equality. That’s an example

  7. Coolshankin
    February 29th, 2012 at 13:18
    Reply | Quote | #7

    @Manohar Seetharam
    I think that homosexual ought to be given the same privileges as we are given, and marriage is one of the privileges. I think that’s fair. That’s also equal. There is no conflict.

    EDIT: I am talking about my framework here. Can you give me an example where I would think that fairness and equality might actually be different.

  8. Manohar Seetharam
    March 1st, 2012 at 03:19
    Reply | Quote | #8

    @Coolshankin
    OK, how about the quota issue , where equality is shunned to uphold justice ?

  9. Subhash Lakshminarayana
    March 1st, 2012 at 13:32
    Reply | Quote | #9

    @ Shankar,

    Your models are good but the big question is whose “fairness” are we talking about?
    Obviously, it has to be the fairness of the soceity as a whole. In this context, I think the basic problem is that you are forgetting to take into account a lot of factors which matter in this case.

    Firstly, the playing conditions. This also relates to Manohar’s point of differentiating between “fairness” and “equality.” However, I do not quite agree with his statment that “fairness” and “equality” are two conflicting objectives. Infact, “equaility” is just one particular notion of “fairness.” Specifically, equality is a notion of fairness under an ideal scenario given that playing conditions are identical. Consider for example the cost of living. Obviously, the cost of living in China is much lower than US. So it does not make any sense to from an employers point of view to pay 200$ to an engineer in China. With the knowledge that to provide the same living conditions an employer has to pay lesser in China, any employer will choose China for less than $200.
    If one stupidly decides to pay $200 to a worker in China too (which is what equality theory would do),we will lose out on the productivity and hence the profits.

    Secondly, the “law of dimishing returs.” To put it simply, if your income today is $1 and you get an appraisal of $1, you gain an increase of 100%. At the same time if your income today is $10, an appraisal of 1$ means only means 10% increase. Hence, the “satisfaction”
    obtained from an appraisal of $1 is different depending on you current level of income. Remember that an average person living in USA has a much higher current income than a person living in China. So if one looks an it from a purely fairness point of view, the new investment has to go to China because the increase in the level of satisfaction is much higher.

    I think the point where it starts to be bad is when corporates exploit people by providing them with extremely bad working conditions and exploiting the workers (which is the real issue with Foxconn). But this is a seprate issue and needs to be addressed separately.

  10. Coolshankin
    March 1st, 2012 at 13:47

    @Manohar Seetharam
    The reservation is based on the assumption that a SC/ST candidate and an upper-class candidate are not equal due to historical reasons. The objective of the reservation policy is to make them equal (in a generation or so). It is a different debate as to whether the assumption is true and whether the objective is being achieved. “Youth for equality,” which opposes reservation say that the assumption is not true today and reservation makes things unequal, and is therefore unfair. In either case, people are in favour of bringing equality.

    @Subhash Lakshminarayana
    I am talking about the a person (or an institution) being fair to everyone else. If you genuinely believe that your workers deserve a meal’s worth of money for 5 hours of work, but you provide them a meal for ten hours of work, I think that you are being unfair to the workers. Whether you are in China or the US, you have to provide same salary (adjusted to purchasing power parity and inflation) to both workers. Chinese workers live is a small room with five other workers. They work for more than 60 hours a week. Their conditions are far worse than American workers. But I am sure that the executive believe that the workers deserve better, but the reason why executives are paying the workers so little is because they can get away with it. That is what I call unfair. Like you said, no one would complain if the conditions are acceptable, but the conditions are so bad that it can only be explained as exploitation.

    UPDATE:

    To clarify my position: suppose that the “market rate” for a job is $50. Both of you think that $50 is too less and pay the worker $70 (you think that $70 is fair). Suppose I know that the market rate is $50 and that you both paid $70, but I think that $100 is the fair price. If I pay $75 for the same job, I am being unfair because I paid less then what I thought was the true price. At the same time, I think that you both are fair because you paid what you believed was the true price.

    UPDATE 2:

    This is how my UPDATE relates to equality. Regardless of who bargains with you, you will stick to $70 as the price for the job (or reluctantly pay more). On the other hand, I would change my price depending on how desparate the other guy is.

  11. Manohar Seetharam
    March 2nd, 2012 at 02:45

    @Coolshankin

    There exist many ways of looking at it. The objective is fairness/justice ( not equality ) is achieved through discrimination. Even those opposing reservation say – “Do discriminate us on the basis of our merit and merit alone”. I am only saying that discrimination is as much a cornerstone of fairness/justice as is equality. It is a judgment as to who are equals and who are unequals, on what grounds are the equal and unequal etc. Where should equality stop and discrimination take over, or where discrimination should stop and equality must take over , and on what grounds etc are the questions to ponder about.

    The idea of fairness that acts as a front for equality completely delegitimises discrimination on all grounds. That’s my central point.

    Shankar : Your example is simply not holistic at all. The goods you produce by paying 100 Rs or 70 Rs will cost more or less depending on what you pay. Now what would be fair to consumers ? So you lose the balance and only end up being selectively fair.

  12. Coolshankin
    March 2nd, 2012 at 03:16

    @Manohar Seetharam
    When two equal people are treated differently, I see that as unfair. In the case of Chinese and American workers, they both work equally hard, but one get paid more than the other. That is what I call unfair.

    In the reservation case, an SC/ST candidate and an upper-class candidate are not considered equal. So the application of my framework does not arise. The preconditions are not met. The whole reason for reservation is ensure a level playing field. That’s nothing but equality. You discriminate in favour of a weaker candidate to bring equality. When is this discrimination fair or unfair? This needs a different framework altogether.

    And as far as my example is considered, it may not be goods I am producing, I may be just paying them to shine my shoes.

  13. Manohar
    March 2nd, 2012 at 13:46

    @Coolshankin
    Well that is the subjective part. That is the judgmenth call i was takking about. You may consider them to be equal while others may not.

    Shankar : that’s justice not equality. Discrimination based on performance , merit is considered just and fair. I am granting that discrimination in favor of sc/st is fair, and just and to achieve it one must discriminate. Equality alone is fundamentally insufficient to define fairness since no two people or situations are perfectly “equal”. It will have to be a balance.

  14. Coolshankin
    March 2nd, 2012 at 14:01

    @Manohar
    My framework is a philosophical one. I made the disclaimer early enough. My framework can only be used in money transactions. It is not a one-size-fits-all framework. In the context of Chinese workers and American workers, how is their social or cultural difference relevant to the factory working floor? In that context, both the workers are equal as long they are equally productive. In the context of entrance examinations, two candidates are not equal according to some people. And those who make the argument in favour of merit assume that the two candidates are equal. I do not see how my framework violates any fundamental principle here. It can be used only when the two parties are considered equal. Whether or not they are indeed equal is a different debate altogether. I do not see anything wrong with my framework itself.

  15. Manohar
    March 2nd, 2012 at 14:54

    @Coolshankin
    Your framework would be satisfied by paying the American labour as low as the Chinese labour too. Would that be fair .?

  16. Coolshankin
    March 2nd, 2012 at 15:21

    @Manohar
    Well, are you paying the American labourer as low as the Chinese labourer because you can get away with it or because you genuinly believe that the low salary is what they deserve? If it is the former, you will change your rate depending on the bargaing power of the other guy. If it is the later, you will be consistant (and reluctantly pay more, only if necessary). If you understand my post, you will know my answer to your question.

    UPDATE: When I am talking about being consistant, a relavant question to ask is if I would pay my future self the same pay as I am paying the Chinese/American worker now? Then you will know if you are really consistant with your idea about what is the good pay for a job. When you really believe that it is the deserving pay, you will pay your future self the same amount too. But if you are just doing that to get away with it, you will have a different rules for your future self.

    Read this: You will see how equality plays a role in deciding a just society:
    ——————————————————————————————————
    “How would you define a just society?”

    “A moral philosopher called John Rawls attempted to say something about it with the following example: Imagine you were a member of distinguished council whose task it was to make all the laws for a future society.”
    “I wouldn’t mind at all being on that council.”
    “They are obliged to consider absolutely every detail, because as soon as they reach an agreement – and everybody has signed the laws – they will all drop dead.”
    “Oh…”
    “But they will immediately come to life again in the society they have legislated for. The point is that they have no idea which position they will have in society.”
    “Ah, I see.”
    “That society would be a just society. It would have arisen among equals.”
    -Jostein Gaarder
    ——————————————————————————————————

  17. Sastry
    March 13th, 2012 at 19:20

    @Coolshankin
    By saying “Well, are you paying the American labourer as low as the Chinese labourer because you can get away with it ” You are making the issue truly one dimensional. The fact is there is one more player in the equation: the government. Government is responsible for setting rules that ensure a fair game. period.

    Analogy: US govt. sets maximum speed of 20mph on roads with schools. Indian road transport authority has no such rule. I am sure 100% of people here will drive at much greater speeds through such roads in India, if there is no traffic etc. Does this mean we disregard the lives of school children. No. Humans have the tendency of operating as close to the limit as they sense practical. And back to your point: this applies both to the businessman and the laborer. Within their own game, the businessman is trying to maximise his profit, while the laborer is trying to maximise what his body can earn.

    Directly (by setting a minimum wage) or setting fair labour rule, it is the role of the government to set rules that permit a fair game. In a democracy, it comes from the people (the workers election). In a communist government, it comes through social unrest (when the workers ultimately get fed up of exploitation)

  18. Coolshankin
    March 14th, 2012 at 16:22

    @Sastry
    I have briefly touched upon your view about government mandate and rule in my post. Also, my definition of fairness is different from what happens in free market. I understand free market very well. I also think that fairness has to come from within, not from a external entity like the govt.